Client Update - 24th July 2020

The market has remained relatively range bound again this week as positive news on better retail sales in June and an agreement on the European Recovery fund being offset by weaker US data, worries over delays to the next round of US stimulus and continued concerns over US-China tensions.

The big news of the week has been the European Council agreeing on a €750 billion ‘Recovery Fund’ after a marathon meeting between all EU27 leaders that began on Friday in Brussels and concluded on Tuesday at 05.31am. Going into the weekend, there were hopes rather than expectations for a deal, given the distance between the main proponents of the deal, France and Germany, and on the other side the ‘frugal four’ of the Netherlands, Austria, Denmark and Sweden.

On the back of the news, the euro currency strengthened further against the US dollar, increasing its recent momentum on the back of the positive conclusion of a meeting that showed European solidarity despite significant political differences. The deal falls short of what Germany and France were seeking but still moves EU countries closer together and sets a strong precedent for joint EU borrowing at times of crisis. Time will tell if these moves persuade international investors to look on Europe in a more favourable light – initial signs from the most recent Bank of America Fund Manager’s Survey do hint at Europe finding more favour.

Unsurprisingly, it has not been such a good week in terms of progress being made towards a trade deal between the UK and the EU at the end of the year. The latest round of talks ended yesterday in London, with both sides still far apart, particularly on the ‘level playing field’ and fisheries. UK negotiator David Frost said that “considerable gaps remain in the most difficult areas” while on the EU side, Michel Barnier said that the UK’s “refusal to commit to conditions of open and fair competition and to a balanced agreement on fisheries” meant that “the UK makes a trade agreement at this point unlikely”. The EU remains frustrated by the lack of concessions on the UK side, and is seeking guarantees on the ‘level playing field’ that the UK will not seek to undercut EU standards. With both sides some way apart, the expectation now is that the crunch time for talks will be from late August through September, with any agreement needing to be reached by mid-October to allow for ratification.

In terms of the Covid-19 pandemic, global cases topped 14 million last weekend, and were over 15.4 million per the latest data this morning, led by the mounting number of cases in the US, Latin America and India. In the hotspot states in the US, the growth in case numbers is showing tentative signs of easing as lockdown measures take effect. All the same, President Trump, striking a more sombre tone than his previous Covid-19 briefing (which was almost three months ago) said that the pandemic will “get worse before it gets better”. As predicted last week, we did indeed hear positive news from the Oxford University vaccine trial, with results published in The Lancet showing the trial vaccine leading to increased levels of antibodies and no serious side effects. This trial took place during April and May on 1,077 adults – the next phase is already taking place in areas where Covid-19 is still widespread, such as the US and Brazil.

Amid all the chatter on the next round of US stimulus, there have been rising concerns this week that a package may not be agreed before the US Congress enters summer recess and temporary Federal unemployment benefit payments lapse at the end of the month. There is talk that the current additional $600/week in unemployment payments will be cut back by around 30% or for those ‘temporarily’ unemployed to receive 70-75% of their previous wage. US Treasury Secretary Steven Mnuchin said that the next round of stimulus will focus on incentives for getting children back into school and workers back into their jobs. He said the starting point for stimulus “was another trillion dollars”, which is a shift from the previous Republican position of a $1 trillion ceiling to further stimulus. The next round of stimulus is also set to see another direct payment to individuals – this comes on top of the $1200 paid out earlier this year. Congress has already agreed to $2.9 trillion of stimulus this year but it appears there is no end to the generosity of the US government at the moment. This could possibly be linked to it being an election year!

It was a relatively quiet week for economic data until the past 24 hours. Yesterday saw the usual weekly new unemployment claims data in the US, and for the first time since the initial huge spike in numbers back in March, the weekly numbers have increased once again. The record high peak back in March was 6.9 million; since then the numbers have been gradually declining, to 1.3 million last week. Yesterday we saw an increase to 1.4 million new claims. To give some context, before the pandemic, the previous record high was 695,000, so unemployment claims have been very high in the US for the past four months. However, until this week some comfort was taken from the declining trend, but the latest data suggests the labour market ‘recovery’ is stalling amidst Covid-19 related restrictions on economic activity being extended or reintroduced.

In the UK this morning, we saw a strong set of retail sales data helped by the reopening of non-essential stores during June. The strength of the data may fade over the summer as pent-up demand fades and concerns over unemployment increase as furlough schemes come to an end. This morning we have seen flash PMI data for Europe indicating strong growth in activity in July with better than expected figures across both services and manufacturing in France and Germany. The UK flash PMI data showed a similar rebound for both services and manufacturing. The one weak spot was in employment, which underlines the concerns for an extended period of higher unemployment as a result of the pandemic.

In light of this developing picture, we are happy that we have reduced our US equity exposure to move more into Asian and European equities and we watch the events over in America with great interest.